AAPL Off 10% on FYQ1 Conference Call: iPad Cannibalizing Mac

By Tiernan Ray

Apple (AAPL) this afternoon held a conference call with analysts to discuss its fiscal Q1results, which featured revenue that slightly missed expectations, and profit per share that slightly beat analysts’ average estimate.

Shares are down $40.10, or almost 8%, at $473.01 $52.01, or over 10%, at $462.

The company started with a presentation by CEO Tim Cook, who remarked of the $54.5 billion that “No technology company has ever reported these kind of results.”

“Apple is in one of the most prolific periods of innovation new products in its history.”

Cook made note of the anniversary tomorrow of the introduction of the first Mac computer:

Tomorrow marks the anniversary of the revolution. On January 24, 1984, Steve introduced the first Macintosh right here at a shareholder meeting in Cupertino. On the evening news that night, they said it was supposed to be one of the easiest computers to use, and thanks to the new mouse, you hardly had to touch the keyboard. We’ve come a long way since 1984, but we rely on the same spirit and drive that brought the original.

Cook said supply of the iPhone 5, as well as the older iPhone 4, was short of demand “until late in the quarter.”

CFO Peter Oppenheimer took over from Cook to go through the quarter’s details and outlook.

The company paid out $2.5 billion in dividends in the quarter, and $2 billion to start its accelerated share repurchase program. The company said $94 billion of its roughly $137 billion in cash was overseas at the end of the quarter. Cash flow in the quarter was $23.4 billion.

The company saw over 2 billion downloads of apps from its App Store in the quarter, and said cumulative app downloads had crossed 40 billion, yielding $7 billion in proceeds so far for third-party developers.

The company’s iMessage short-message service is sending 2 billion-plus messages a day, and over 450 billion cumulative messages at this point.

With 396 stores around the world, average revenue per store was 1.25 million per store per week, compared with $1.22 million per store per week a year earlier.

Gross margin of 38.6%, higher than the company’s 36% projection, was driven by lower product and “transitory” costs, and by a higher mix of iPhones in the quarter. Visitors to the stores were up 7%, on average.

Oppenheimer called the sale of over 75 million devices based on the company’s iOS operating system “staggering.”

Turning to the company’s forecast for $41 billion to $43 billion, Oppenheimer described the outlook in contrast to past as follows:

In recent years our guidance reflected a conservative point estimate for results every quarter that we have reasonable confidence in achieving. Going forward, we plan to provide a range of guidance that reflect our belief of what we are likely to achieve. While we cannot forecast with complete accuracy, we believe we are likely to report within the range of guidance we provided.

The first question during the Q&A came from Morgan Stanley‘s Katy Huberty, who said that while iPhone sales seemed to be quite healthy, she wondered how the company thought it was faring in overseas markets.

Cook responded that the highest growth in the quarter was in China, where growth was “into the triple-digits,” and higher than the markets.

Huberty also asked Oppenheimer why the company wasn’t more aggressive with its share buyback plan.

“We expect to return about $45 billion over three years to our shareholders” between dividends and buybacks, said Oppenheimer.

When Goldman Sach’s Bill Shope pressed about trends in the supply chain, Cook insisted on making an extended comment about supply chain rumors:

I would suggest it’s good to question the accuracy about any kind of rumor about build plans. Even if a particular data point were factural, it would be impossible to interpret the data point as to what it means for our business. Because the supply chain is very complex. Yields might vary, the beginning inventory might vary. There is a whole list of things that might make any single data point not a great proxy for what is going on.

When Bernstein Research’s Toni Sacconaghi questioned Oppenheimer about his remarks on guidance, the following exchange ensued:

Oppenheimer: In the past we provided a single point guidance that was reasonable and conservative. This quarter and going forward we are going to provide a range of guidance that we think we are going to report within.

Sacconaghi: Was the guidance before something you felt confident in? Or was there a buffer? Because you eclipsed it enormously. And this time you’re saying there’s a reasonable chance you’ll fall within. I’m trying to understand the distinction.

Oppenheimer: Let me repeat: We’re now providing you a rang eof guidance that we can expect to, as best we can, report within.

When Piper Jaffray‘s Gene Munster pressed Oppenheimer on the same matter later on, Oppenheimer remarked, “Our prior method of providing guidance was a point estimate. Our guidance for the March quarter and how we will give guidance in the future is we will give a range for revenue, gross margin, and operating expenses, and there’s a variety of possibilities for EPS. ”

When Cook was asked about sales of 4.1 million Mac computers, fewer than many were expecting, Cook reminded them that he had said in the prior conference call that there were “substantial constraints” on production of new models. He also noted that in the prior-year quarter, when the company sold 5.2 million units, the company had been filling in a market that had been depleted of inventory at the start of that quarter. He also noted that the prior-year quarter had an extra seven days.

Cook then went on to discuss weakness in the broader PC market and cannibalization of PCs by the iPad:

The market for PCs is week. We sold 23 million iPads. We obviously could have sold more than this because we could not build enough iPad minis to come into a demand balance. I’m sure there was some cannibalization of Macs there. The difference in seven days extra in the previous year, and the extra channel inventory, more than explains the difference.

Cook later added, “Our philosophy is never to fear cannibalization. We have the mother of all opportunities with iPad, because the Windows market is much bigger than the Mac market. I’ve said for a number of years that the tablet market will be bigger than the PC market, and I still believe that.”

“If someone buys and iPad mini or iPad, and its their first Apple product, we’ve seen a percentage of these people wind up buying another Apple product. We’re very confident that the [halo effect] will happen, and we’re seeing some evidence of that happening with the iPad.”

UBS‘s Steve Milunovich asked about the iPad mini how much the company left on the table. “It’s hard to know,” said Oppenheimer. “We were constrained every week … people love iPad mini, and we ended the quarter with significant backlog.”

Regardingthe average selling price for the iPhone, Cook said it was “essentially the same” as in the prior-year quarter, and the mix of model types — high end, lower end, lowest, etc. — was also essentially the same.

Regarding capital expenditures, Milunovich pointed out that the company was spending almost as much as Intel (INTC), roughly $10 billion this fiscal year. That is up about $2 billion, year over year. A little under a billion of that is to be spent on retail stores. Oppenheimer said some of the rest will be spent on equipment in supplier’s facilities. But he said the company was also adding to its data center facilities.

Digging into iPad outlook, Oppenheimer said that the company expects it will see a “large year-over-year” increase in iPad this quarter, even though it will be down from the prior quarter.

When Oppenheimer declined to break out how many iPad sales were for the regular-sized model, and how many were for the mini, Cook stepped in to state, “I think it’s worth pointing out that we had strong sales of both the iPad and the iPad mini.”

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There are 30 comments

JANUARY 23, 2013 5:29 P.M.

Anonymous wrote:

this is what months of bashing does. great results still get punished. meanwhile google reported essentailly the same thing, in line earnings slight revenue miss and it is up $40, apple down $40.

JANUARY 23, 2013 5:44 P.M.

Pras wrote:

Seems like Apple is poised for another good quarter - iPad mini demand is still not being met, iMac constrained and seemingly good prospects for improving margins. Also the buyback has started and is in progress now while stock price is low. Makes for a good long term picture.

JANUARY 23, 2013 5:51 P.M.

Ed wrote:

Tim Cook can go F himself!!

JANUARY 23, 2013 5:53 P.M.

Anonymous wrote:

has nothing to do with bashing, son. lots of empty answers

JANUARY 23, 2013 5:54 P.M.

Anonymous wrote:

hey fellas. heads up.
this ain't bashing --- read their responses and listen to the call.
the apple arrogance is back and the street aint gonna take it.

Buy rumors -- Sell the News.

JANUARY 23, 2013 5:56 P.M.

Ed wrote:

Fire Oppenheimer. He is a misfit. What he
should have done is use the $50B right now
to buy back stock. Apple is done. It is
done. Get use to it. It is being run by
children now. 460 what a Disgrace

JANUARY 23, 2013 6:02 P.M.

Ed wrote:

What a circus Apple gas become. A circus.
Steve Jobs is rolling around. Tim Cook
and Peter Useless Oppenhemier have no
F clue on what they are doing

JANUARY 23, 2013 6:08 P.M.

Dpinchot wrote:

43 billion is revenue for the quarter. Gross margin of over 38%. I can see why Apple is done.

JANUARY 23, 2013 6:10 P.M.

Dpinchot wrote:

Ed, you are the clueless one. What an idiot.

JANUARY 23, 2013 6:10 P.M.

Where is $1000 a share? wrote:

Hey Munster, I need to send my kids to college!

JANUARY 23, 2013 6:12 P.M.

Apple stores always full wrote:

Hey where are the posts everyday saying how full Apple's stores are compared to Microsoft? Why doesn't all this traffic translate to dollars?

JANUARY 23, 2013 6:12 P.M.

Paul wrote:

Apple is now the most Hated company in
the world. Under Jobs it was Loved. Tim
Cook is a boyscout among real men. He
is a complete failure and it's time Jony Ives
gets the CEO job. The board must act
now!

JANUARY 23, 2013 6:16 P.M.

Moe Skoshi wrote:

I'm so glad I didn't sink another penny into this failing stock when so many people said $500 was the bottom limit. I was tempted to buy a few more shares. I now see that Apple has no bottom limit. This stock could free-fall to $400 in an instant. Apple is basically worth less than either Amazon or Netflix as far as Wall Street is concerned. Apple is the ultimate value trap. Solid fundamentals but basically not worth a damn thing to investors or shareholders. Could someone tell me how a company making so much money is worth so little? Where the hell is all that money going? Apple continues to build more retail stores, but even that is a waste as consumers are buying less Apple products. Samsung doesn't even have any retail stores and they're selling more smartphones than Apple. Apple is truly becoming a disgrace for a supposedly successful American company.

JANUARY 23, 2013 6:23 P.M.

Ed wrote:

@dpinchit: you are the clueless one. Apple
stock price is a disgrace and the company
is being laughed at by Wall Street. You keep
on beating your chest on their great numbers
and the stock will continue to fall. Cook
is a lightweight and his staff are a bunch of
Pussies just like Cook. The only thing
that is Staggering is the drop in the stock
price. People are getting out of Apple trust
me. Google is the clear winner here. Apple
is the next Rimm.

JANUARY 23, 2013 6:26 P.M.

Will wrote:

Down 60 points. Down 60 points. Are you
F kidding me? Get rid of the a hole CEO now
700 to 450 in 3 months! Nice job Timmy

JANUARY 23, 2013 6:27 P.M.

Oil companies rule this planet - not software companies wrote:

Um...is Apple still the most valuable company in the world or is it Exxon (again)

JANUARY 23, 2013 6:38 P.M.

Dpinchot wrote:

@Ed apple just rated the biggest quarter in history. Period. What more do you want?

JANUARY 23, 2013 6:40 P.M.

Pete D. wrote:

Hate to say this because I've been long AAPL for about 10 years as people reading this blog may remember, but EPS was flat y/y. Despite y/y rev growth of 17.7%, and y/y profit growth of 6.1%, EPS was $13.87 in Dec quarter 2011 and $13.81 for Dec quarter 2012 (due to increase in float resulting from options,RSUs, and ESPP). Only reason to give any company a high multiple of earnings is based on earnings growth. APPL's PEG has been around 1 for a while. If the EPS don't resume growth the PE could contract to about 7 (a level that's appropriate for a cash machine without growth). That means the floor is indeed around $300 to $320. The simplest answer to juice the EPS would be a massive buy-back at current levels. Gross Margin guidance is troubling. It was to be expected that it would be under pressure for a quarter with new products. But next quarter doesn't seem to have prospects for major new products yet GM guidance remains about 38%.

Selling an ipad with a smaller screen or an iphone with a larger one, this is the extent of Apple's innovation of late. It's time for a catalyst, it's time to change the game. Cook needs to step into a new category, and do it now, or Apple will continue to dissapoint.

JANUARY 23, 2013 7:24 P.M.

Damien Smith wrote:

Howtobuyhotpennystocks dotcom (Dot means .), is the perfect place to develop a base for AAPL stock and a must visit and subscribe

JANUARY 23, 2013 8:11 P.M.

Tom wrote:

@Ed what an idiot you really are. Most ever sales of phones, ipads and revenue and profit that cannot be touched by any other company in the world yet they're done? Why do you bother coming here when all that comes out of your mouth is just rubbish?

JANUARY 23, 2013 8:13 P.M.

DY wrote:

Wow, it's amazing how often history repeats itself. People thought Apple would be done after the iPod peaked its life cycle. Then came the iPhone which propelled AAPL to be the most valuable company in the world. The iPhone is similarly reaching a peak in its life cycle in terms of market share, and people are quick to abandon ship. What they forget is that 1- Apple still DOMINATES the tablet market and will for a long time, 2- the Apple TV set will be an entirely new market in which Apple will likely dominate, and 3- CASH.

JANUARY 23, 2013 9:23 P.M.

petten wrote:

The post that makes best sense of the situation was from "Pete D."

JANUARY 23, 2013 10:01 P.M.

Tfunk wrote:

i knew it i knew this was going to happen

thetabletstore.net

JANUARY 23, 2013 11:21 P.M.

John Doe wrote:

Apple's innovations after Tim took over can only be termed as "Timid". Siri, Apple Maps, marginal increase in iPhone screen size, reduction in screen size of iPad mini. iPhone users feel embarrassed by holding out a phone that hasn't changed much in appearance for the last few years.

JANUARY 24, 2013 12:06 A.M.

jason wrote:

Analyst expectations are so high for Apple that $54 billion is still not good enough. Come on, 47 million iPhones in 13 weeks, that is ridiculous. Apple's stock has moved so fast up that hedge funds are taking profits and looking for other growth companies. What does the Street expect from Apple next year? 90 million iPhones in Q1 '14, Because they sold 26 million in Q1 '12. Bring down expectations and introduce Apple TV and everyone will fall back in love with Apple. Even Jim Cramer (HAHA)

JANUARY 24, 2013 11:23 A.M.

Anonymous wrote:

The answer is simple They have to get mean again. Real mean. Like search and destroy. Screw this passivity. Eat or be eaten. Destroy or be destroyed.

JANUARY 24, 2013 11:47 A.M.

Bilal wrote:

Expectation.. That was the word that leads a debacle in Earnings of Apple.Those days are Gone when Markets use to follow Apple.Apple needs to come up with a cheaper Iphone if it really wants to sustain its dominance. Public sentiment is also reversed in few months about apple stock. A healthy info about Stock is given at http://tinyurl.com/au6wszf

JANUARY 24, 2013 11:51 A.M.

Anonymous wrote:

So, Apple grows more than 100% in mainland China, which is where all the growth is supposed to come from anyway for the next 5 years and analysts ignore that.

good work analysts, way to present insightful analysis instead of rear view mirror knee jerking.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.